FINANCING CONTINGENCY: Should I Waive My Finance Contingency?

Financing Contingency
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A financing contingency clause protects the buyer if they are unable to obtain a loan. The goal of a financing contingency is to ensure that the buyer is not penalized for not being able to secure financing and complete the transaction. When the market becomes competitive, for example, buyers prefer to waive their financing contingency. They do this to see if they can improve their offers in order to have a better chance of getting accepted. Therefore, waiving a financing contingency can be tricky. To avoid risks that may arise if you choose to waive your financing contingency, you should work with an expert realtor. Let’s go into details

What Is a Financing Contingency?

A financing contingency clause is an agreement in a home purchase and sale that states that your offer is contingent on being able to obtain financing for the property. In most cases, a buyer will use this clause to set a specific time frame in which to apply for a mortgage and/or close on the loan. The buyer will also include the type of loan they intend to obtain, their down payment amount, the loan term, and the interest rate in this clause.

In a purchase contract, the buyer and seller must agree on how long the loan contingency period will be, which is usually between 30 and 60 days. Before closing on a house, the buyer has to secure financing and obtain mortgage approval.

How Does a Mortgage Contingency Work?

The first step in the buying process is submitting a purchase offer to the seller. However, if they have not been preapproved for a mortgage, they can include a mortgage contingency in their offer. The buyer will submit an earnest money deposit after both parties sign the purchase agreement, and the seller will remove the property from the market.

The first step in the buying process is submitting a purchase offer to the seller. However, if they have not been preapproved for a mortgage, they can include a mortgage contingency in their offer. The buyer will submit an earnest money deposit after both parties sign the purchase agreement, and the seller will remove the property from the market.

The buyer now has the length of the mortgage contingency period to secure financing from a lender. After the lender approves the mortgage, he takes the commitment letter to proceed with the home closing.

However, if the buyer does not qualify for the loan or fails to secure financing in a timely manner, they have the option to cancel the contract. A mortgage contingency clause allows either party to back out of the home sale agreement without penalty during the contingency period. The buyer will get their earnest money deposit back, and the seller will be free to accept other offers.

Financing Contingency Clause Example

The following is an example of a financing contingency clause from a purchase contract.

#1. Financing/Mortgage Contingency Agreement

First, the mortgage/financing contingency clause makes it clear that all other parts of the contract are no longer valid if the buyer can’t get a mortgage commitment. This clause protects the buyer by allowing him or her to cancel the contract without incurring any legal consequences. This also helps you not lose any money that has already been deposited. If the original buyer is unable to obtain a mortgage, the seller has the option to move on to another buyer because of this clause.

#2. Lending Terms

A mortgage contingency clause should specify the specific terms of the mortgage commitment that will be acceptable to the buyer. The buyer can do this through the dollar amount, interest rate, or any fee that the lender charges. This protects the buyer in a number of ways, which includes

  • When an applicant’s mortgage is spun down for any reason, this insurance covers the buyer.
  • A secondary safeguard for the buyer is the inclusion of the exact amount that must be approved. There are no penalties for canceling the contract in the event that he or she gets a mortgage.
  • It also protects the buyer by stating the interest rate that the buyer must agree on. If the interest rate is too high, the buyer may decide not to proceed with the purchase. For buyers who aren’t happy with a lender’s interest rate, simply stating that the interest rate “must be satisfactory to the buyer” gives the buyer an opportunity to get out of a loan.

#3. Financing Contingency Date

The buyer and seller must agree on this time frame, which is usually between 30 and 60 days. If the buyer is unable to obtain a mortgage within this time frame, the seller has the option to cancel the contract and proceed to other interested buyers.

#4. If a Mortgage Cannot Be Obtained

If the buyer does not obtain a mortgage within the financing contingency date, both the buyer and the seller can back out. Here, the buyer has the right to a refund of any deposit funds already paid. At this point, the seller is also free to walk away. If the buyer does not get the mortgage on the specific date for the financing contingency, either party usually has to let the other party know in writing that they want to back out of the deal.

#5. Extension of the Contingency Date

In cases where the buyer didn’t receive a mortgage commitment by the financing contingency date. The seller may agree to extend the deadline for the buyer to obtain their financial backing.  Both the buyer and the seller will agree on the length of the extension.

Should You Waive a Financing Contingency Condition?

For some buyers, it may make sense to waive their mortgage contingency clause in their real estate contract. This is because of the specific situation they are currently in. Buyers may consider this option if they are paying cash for the property or with extreme caution if they have been preapproved for the necessary loan. A seller who is weighing multiple offers in a competitive market, for example, may ask buyers to waive the financing contingency in order to close the sale quickly.

In today’s highly competitive market, appraisal contingency is particularly difficult to navigate. Many prospective home buyers are opting to waive the appraisal in order to make a more appealing offer. The appraisal’s goal is to ensure that the home’s value is equal to (or close to) the purchase price.

Just keep in mind that if you do this and the home you put a contract on appraises for $75,000 less than the asking price, you will be responsible for the difference. You have the option of paying $75,000 cash or contacting your home loan specialist for assistance with an appraisal gap strategy.

Many homebuyers are skipping the sale of their home and other financing conditions altogether by using bridge loans. A bridge loan can help you put together a strong purchase offer and give you flexibility when looking for a new home. This helps you close on the new home before selling your current one. However, if you sell your house, you’ll have enough money to pay both the bridge loan and the current mortgage.

It is risky to waive the financing contingency clause. If the buyer’s mortgage application fails after waiving the protective clause, they will forfeit their earnest money deposit and be subject to additional fees and possible legal action.

The Risks of Not Having a Financing Contingency

There are three major risks associated with not having a financing contingency. 

  • Your financial situation. To avoid any unpleasant surprises, be sure to thoroughly explain your intentions to your lender before signing any documents.
  • The building: The lender is also underwriting the building in addition to your financials. They could be dealing with an imbalanced budget or pending litigation. Check with your lender to see if the building has been approved. Additionally, you’ll be able to see which lenders have made recent loans to the building in question.
  • Low Appraisal: if the appraisal is low, you will need to increase your down payment.

Conclusion

It is a common practice to include a mortgage contingency clause as a safety net for both buyers and sellers during the home buying process. During negotiations, both parties should be ready to discuss loan terms and be aware of the dangers of doing so. You should always consult with your lender and agent to ensure that you understand the risk while waiving your contingency. Make sure that you are completely comfortable with them.

Financing Contingency FAQs

How long is a financing contingency?

A contingency period usually lasts between 30 and 60 days. If the buyer is unable to obtain a mortgage within the time frame agreed upon, the seller has the option to cancel the contract and find another buyer. This deadline may be critical if you are unable to obtain financing.

Should I waive financing contingency?

The most obvious disadvantage of waiving your financing contingency is the loss of your deposit. However, it is not the only one. If the lender’s appraisal is lower than average, this strategy will cost you a lot more money. 

Why you should never waive an appraisal?

This waiver of the appraisal contingency may be a more common occurrence among desperate buyers. If you agree to pay more than the appraised value for a property, you will have a more difficult time obtaining a mortgage without renegotiating the sale price.

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